Volcker: Fed Can Maintain Stimulus While Inflation Is Low

Former Federal Reserve Chairman Paul Volcker said the U.S. central bank can channel record stimulus into the economy so long as it stays true to its pledge to keep inflation low.

“The massive provision of credit by the Federal Reserve can continue for a while alongside the fiscal deficit, so long as the commitment to maintain price stability over time is respected,” Volcker said in remarks prepared for a speech Friday to the ICAS conference in Gleneagles, Scotland. “There is no significant inflationary pressure at present.”

The Fed panel that sets interest rates announced a third round of quantitative easing Sept. 13, committing to $40 billion in monthly purchases of mortgage-backed securities. The Federal Open Market Committee said the buying would continue “if the outlook for the labor market does not improve substantially.”

While Fed chairman from 1979 to 1987, Volcker raised interest rates to as high as 20 percent to tame an annual inflation rate approaching 15 percent.

The former Fed chairman called on political leaders in the U.S. to find agreement on fiscal policy and lead the global economy back to growth.

“We know the stakes are enormous,” Volcker said to the Institute of Chartered Accountants of Scotland. “Given the situation in Europe and Japan -- and growing doubts about growth in China and elsewhere in the emerging world -- it is only the United States that in the short run can lead the world into a pattern of more solid -- and lasting -- growth.”

Volcker’s New York office provided Bloomberg News with a text of his remarks by e-mail.

“The aim should be to cut the current fiscal deficit in half during the life of the new administration,” Volcker said, referring to the U.S.

The former Fed chairman predicted Europe’s common currency would survive its current crisis.

“The often stated sense of commitment among European leaders is genuine,” Volcker said. “There seems to be an instinct among European populations to stick with the euro.”